Tuesday, April 7, 2009

Have you ever wished that you need not carry a fat wallet in your pocket? You wallet typically has paper bills, a few coins and loads of cards (credit, debit and loyalty cards). It is a real pain carrying this fat wallet around. For small payments, the credit card still cannot be used as the cost of transaction to the merchant is a minimum of 20 cents and hence the merchants refuse to accept the cards for low value transactions. Mobile payments promises to provide an alternate payment mechanism that would not only lower the cost of transactions but also will be more secure. Also, the adoption is likely to be higher as there are more subscribers of mobile phones than the credit or debit cards especially in emerging economies. I have already predicted in one of my earlier posts that that Mobile Money Transfer would gain traction in 2009/2010 (My Predictions for Telecom Industry in 2009/2010).

Mobile payments are a subset of broader term “Mobile Transactions”. Mobile transactions could be of various types like the mobile payments, mobile ticketing, mobile banking and mobile loyalty. Mobile payments are remote or in-store payment transactions that are conducted on the mobile phones. There are various methods of making the payment from SMS to contactless Near Field Communications (NFC).

There are many benefits of mobile payments. In the emerging markets, over 75-80% of the transactions are cash based with no accountability for a large part of it. We call this parallel economy. This parallel economy is essentially created to avoid taxes but now there are concerns of terrorists getting money through money laundering which is an off-shoot of the parallel economy. To reduce the size of parallel economy, it is important to maximize payments through credit cards, debit cards and other forms of electronic transactions where there is money trail. Mobile payments are one significant step in that direction. Mobile payments would not only bring small transactions within its scope but also would have a higher reach as more people have mobile phones than other forms of electronic payments. Other benefits of mobile payments are convenience and speed of transactions.

There are three types of mobile payments: Remote payments, proximity payments and peer-to-peer payments (including remittances).

Proximity Payments – The contactless NFC holds significant promise in proximity payments and is particularly appropriate for low value transactions in high volume retail points. Mobile payments are being pushed by Visa and Mastercard as the way to pay for the estimated worldwide total of US$724 billion transactions for less than US$25 (source: MasterCard International). Strategy Analytics estimates 1 in 5 handsets would be NFC enabled in 2012.

NFC has significant advantages in terms of speed of transaction as it is estimated that it is around 8-9 seconds faster than card payments and approximately 20-25 seconds faster than cash payments. This should add to the convenience of the consumer. NFC implementation should result in lower cost for the retailers as the requirement for staff gets reduced significantly not only at the cash counters but also in the purchase area where staff is needed to provide assistance and information. However, the key to success of this technology would be the price of NFC chip in the handset

Remote Payments – The remote payments using mobile phones is similar to that currently being done on the PCs through the web. However, the real benefit of the mobile phones would come from the location. The location information of the consumer can be used by the merchants to further provide value added services to the consumer or would help them cross-sell other products that are location specific

Peer-to-Peer Payments – This is a big opportunity as currently the international remittances is over $250 billion a year and add to this the domestic remittance, the value of such transactions is likely to cross $ 1 trillion. On top of this, think about a situation where your kid has run out of money while trekking in a remote location and you can transfer the money using your mobile. This is a huge opportunity to miss. In case of remittances, the commissions are as high as 15% plus the inconvenience of visiting the agent’s office to send or take money. The mobile remittances promise to remove the inconvenience as well as lower the transaction cost. GSMA (GSM Association) has taken up mobile money transfer as one of its major projects. A few successful examples of Peer-to-Peer transfers are M-Pesa of Safaricom in Kenya and GCash of Globe Telecom in Philippines.

Juniper estimates that for purchases via mobile devices of digital and physical goods, contactless NFC (Near Field Communications) transactions and money transfers will together generate transactions worth over $600bn globally by 2013 with over 1 billion people using mobiles for transactions. Half of the $600 billion is expected from the mobile payments and the other half from money transfers.

All these technologies are still in the pilot phase and their success would depend a lot on the consumer acceptance. Will the consumers accept mobile payments? I would say – CERTAINLY provided the following concerns of consumers are addressed

Security – Consumers would like the most trusted brands within the ecosystem to be associated with mobile payments. They would want surety about the security of their money as the mobile transaction could be a significant portion of their salary for people in the emerging markets. Surety from a banking organization would go a long way in allaying the consumer fears. Also, the players would need to address concerns on lost mobiles

Convenience – By convenience, I mean that the speed at which the transaction is completed should be less than that of the credit card or cash and it should be hassle free. I was reading somewhere that there was a suggestion that the consumers should carry their identity card while using their mobile for payments to establish identity. This is ridiculous!!! Any extra effort needed on part of the consumers would not help the cause of mobile payments. This system should indeed reduce the burden of carrying multiple cards and cash

Easy to use – Many consumers have technology phobia. They would rather use complicated but manual processes rather than technology. Hence it is important to have transactions as easy has sending sms and should be completed with one press of button. Even better if no button needs to be pressed

Acceptability at merchant points – This is a chicken and egg situation. Consumers would adopt if there are enough merchants accepting the payments and merchants would want enough consumer pull. In this situation, having a partner in the form of Visa, Master or Amex would certainly help

Transaction costs – The transaction costs need to be limited in this form of payment to encourage wider acceptance for low value transactions. It should provide a clear monetary benefit over other existing payment and money transfer mechanisms

Redemption points – In case of money transfer or store value accounts, there would be enough physical locations where consumers can cash out

Training & education – The players need to be patient when it comes to the adoption of mobile transactions. Customer training and education is the key. Road shows and awareness programs can be held in malls and other high traffic locations. The success would come only when the rural areas have sufficient adoption. In emerging markets, the players can have rural vans that can be jointly run by service providers, handset vendors and the payment players to educate the customers on mobile transactions and at the same time provide customer care

Mobile payments have a great potential for all the players in the eco-system and it could be one of the ways by which carriers can prevent their marginalization. In the next few posts, I plan to cover other aspects of mobile transactions including ticketing and coupons. Till then do give me your feedback on what the different players in the ecosystem can do to increase mobile payments adoption

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About Me

Mohit is a telecom professional with rich experience over 15 years. His expertise is in the area of strategy and planning and his work experience includes stints with two of Big 5 consulting organizations, a telecom operator and a handset vendor